| SAN FRANCISCO/SAN BERNARDINO, July 15
SAN FRANCISCO/SAN BERNARDINO, July 15 In August
2010, almost two years before the San Bernardino city council
abruptly voted to seek bankruptcy protection, city manager
Charles McNeely gave a presentation to the council that became
known as "Groundhog Day."
McNeely, who has since resigned, warned that the city of
210,000 was facing financial ruin. The sharp fall in housing
prices had slashed tax collections even as employee pay and
benefit costs spiraled upwards. Years of budgetary gimmicks
would come home to roost in the form of a $40 million deficit in
the current fiscal year, he predicted.
"He used that analogy because the city had every year been
doing the same stupid things," Tobin Brinker, a former city
council member, said, noting the comparison with the comic movie
in which the lead character keeps reliving the same day.
McNeely's wake-up alarm, which itself came three years after
a management consulting firm had warned of big problems ahead,
went unheeded. Instead, local leaders continued to engage in
bitter political and legal warfare over the city's biggest
expense -- pay and benefits for police officers and firefighters
-- and failed to warn local residents and financial markets of
the depth of the problems.
While San Bernardino was in economic decline even before the
Great Recession and took a big hit from the housing bust, the
slide toward bankruptcy has as much to do with the city's
poisonous politics and the outsized influence of public safety
employees as with the broader economy.
The city charter pegs police and firefighter pay to the
wages offered by comparably sized California cities, a heavy
burden for a city suffering a 15 percent unemployment rate. The
city calculates that public safety spending now accounts for 73
percent of the general fund budget, with overtime for
firefighters cited by McNeely and others as especially
The city imposed a temporary 10 percent pay cut several
years ago, but the firefighters union successfully challenged
the move in court and the city now owes its members back pay.
Two union-backed candidates won city council seats last year.
Pension costs, meanwhile, will reach $25 million this year,
double the 2006 level.
The firefighters union, for its part, rejects the notion
that it is at fault, accusing Mayor Patrick Morris of being
"anti-public safety" and questioning the city's budget numbers.
"At this point, I don't think anyone should trust any
numbers that come out of the city," said Corey Glave, general
counsel for the San Bernardino Professional Firefighters. "Right
now the firefighters are tired of hearing that it's their fault
for everything. They are going to work and do their best job."
The political infighting, vividly on display in the days
since the city council's surprise July 10 vote to seek
bankruptcy protection, even extends to fraud allegations
advanced by James Penman, the long-time city attorney.
Penman said ahead of the bankruptcy vote that financial
documents had been falsified in 13 of the past 16 years, but
toned down his claims the next day, telling reporters that
"evidence of suggested wrongdoing" had been turned over to
unnamed government agencies.
Pressed by reporters, the San Bernardino County sheriff's
department confirmed an investigation "related to allegations of
possible criminal activity within departments of the San
Bernardino city government." It is not clear the investigation
has to do with budgetary chicanery -- and Penman, who ran twice
unsuccessfully for mayor against Morris, is seen as a political
ally of the public safety unions.
"He needs to put up or shut up," said city councilman Fred
Shorett, who voted against the bankruptcy. "He's trying to get
everybody's eye off the real issue, which in my view is
compensation for police and fire."
Matt Wilson, whose accounting firm has audited the city's
finances each year since 2007, said he has no idea what Penman
is talking about. "We didn't find anything that was
misrepresented," he said. "We issued an unqualified opinion each
The interim city manager, Andrea Miller, who took over after
McNeely resigned in March, also said she had not "seen anything
in that arena that has caused me any concern." A switch in
financial software systems has uncovered some accounting errors,
she said, but they are insignificant.
She broadly corroborated McNeely's account of how the crisis
came about. "We just don't have cash reserves to fund operating
costs," she said.
A CITY IN DENIAL
McNeely, who served three years as San Bernardino city
manager after 13 years in the same post in Reno, Nevada, said
the writing has been on the wall for years. The city, 65 miles
east of Los Angeles, had suffered economic reversals for years,
first from the loss of heavy industry decades ago, then from the
closure of a big military base in the 1990s, and most recently
from a housing boom that went bust.
As far back as 2007, a review by consulting firm Management
Partners Inc said San Bernardino's finances were at risk because
public safety spending was growing faster than city revenue. The
review added that the city charter's special treatment for
public safety salaries was a form of "autopilot" budgeting that
provided "little incentive for labor groups to negotiate at the
In his 2010 presentation, McNeely projected that spending
would outstrip revenue through 2015. For the current fiscal
year, he predicted spending would exceed revenue by $40 million,
which is about the difference city officials forecast last week.
"I don't know how you could come out of that meeting not
understanding we had a serious problem," he said. "I told them,
'You're headed for trouble, it's a train wreck, you can't keep
doing business this way.'"
Around the same time, the mayor rang alarm bells in a column
in the San Bernardino Sun newspaper, warning of insolvency due
to a "long-term lack of fiscal discipline."
But what followed were more short-term fixes: spending and
pay cuts, modest layoffs, deferred purchases, the tapping of
reserves, borrowing from a now-shuttered redevelopment agency,
and selling city property. What was really needed was a larger
overhaul of budget priorities, said McNeely.
"I didn't see them dealing with the issues and I didn't want
to be part of that anymore," he said.
Former fire chief Mike Conrad said there was no sense of
urgency around the fiscal problems. "It was nibbling around the
edges," Conrad said. "All of us that were department heads were
not surprised the city was headed for a fall."
Shorett, the city councilman, says that even now he doubts
the council has the will to press city unions for serious
pension concessions. Pension deals were actually sweetened as
recently as 2007.
"You have unions on one side of the table negotiating with
people they just helped elect," Shorett said.
"Herding cats is not even close to the reality of this
place," said Jim Morris, chief of staff to the mayor and also
the mayor's son. As recently as April, he said, warnings of a
looming financial disaster went unheeded by some in the city
council's chambers, where "there's always been this sense of
questioning the professional management's numbers."
SURPRISE BANKRUPTCY VOTE
The city council vote made San Bernardino the third
California city to seek bankruptcy protection in the last two
months. Because the move caught local residents and municipal
bond investors by surprise, it raised concerns that other
California cities may have hidden fiscal crises.
The city of Stockton, which like San Bernardino has suffered
severely from the housing crash, telegraphed its situation
months ahead of time, and became the largest U.S. city to file
for bankruptcy only after a mediation effort failed to produce
an agreement with creditors.
Similarly, the problems in the ski resort city of Mammoth
Lakes, which faces a nearly $43 million legal judgment that
would swamp its budget, were well known long before it filed for
In San Bernardino, the depth of the problems were evident
only to insiders.
"A year ago it looked like the city had a tough budget in
front of them, but it looked like they took tough decisions,"
said Dick Larkin, director of credit analysis at muni bond
broker-dealer HJ Sims.
But a financial report for the city council dated July 9,
which precipitated the bankruptcy vote, made it clear that
little had been solved.
City finance officials project that San Bernardino will have
about $120 million in general fund revenue for the fiscal year
that began on July 1 -- down from a peak of about $140 million
in 2007. That leaves it about $45 million short for its
commitments. The city also has so little cash on hand it may not
be able to meet its contractual and debt obligations as early as
The report said spending had outpaced revenue for some
years, reserves were depleted, and the old ways to pay off
deficit spending were no longer available. And labor costs are
projected to rise by $10 million a year in the coming years as
concessions expire and contributions to the state pension fund
The city also expects to pay more for its employees'
pensions and faces rising liability expenses from accidents
linked to street and other public works repairs it has
postponed, Miller said.
"It's a whole series of things coming together," Miller
said. "Ultimately the city could not bear all that."